Would You Invest Four Hours to Stop the IRS from Taking One-Half of Your Wealth?

Over the years I have asked the above question hundreds of times, when giving one of my many tax-saving seminars, or over the phone when a reader of this column calls me. The response is almost als the same: an enthusiastic “Yes,” followed by something like, “Irv, how do you do that?”

The answer is with a system, to be exact, with a comprehensive system. Let’s start by getting an overview of the system. Forty years ago the system was designed to reduce estate tax. But over the years it has evolved to focus on keeping all of a client’s wealth. Because the system does keep all of your wealth in your family, it automatically eliminates the impact of the estate tax.

For example, if you are worth $6 million, the entire $6 million goes to your family—all taxes paid in full; if $66 million (it can be more or less), the entire $66 million to your family. Jot down the amount you think you might be worth when you die. That’s the amount the IRS wants to get at. The system will guide you step-by-step to keep every dollar of your wealth in your family.

But a properly designed estate plan must do more. It must be comprehensive, which required us to develop a comprehensive system. Just what does “comprehensive” mean in this context? Well, experience has taught us that the typical client wants not only an estate plan (really a death plan), but also a lifetime plan that accomplishes at a minimum the following:

1) Control his wealth, particularly his business, for as long as he lives.

2) Have strategies in place that help him save income, payroll, capital gains and gift taxes.

3) Find the best to transfer his business to the business children (it can actually be done tax-free).

4) Treat the nonbusiness children fairly.

5) Make sure he and his wife can maintain their lifestyle for as long as they live.

Note: Generally does not apply to the mega-wealthy—worth about $25 million or more.

6) Keep the stock of the family business in the family if one or more of the business children (who owns stock) gets divorced.

A comprehensive plan created using the system handles not only the six “wants” listed above, but almost any tax or economic want of the business owner for himself, his business or his family. The technical aspects of the system are changed or modified as required to deal with changes in the law, economic conditions and other factors over the course of the client’s lifetime.

Now, let’s follow how the system was implemented by a real-life reader (Joe). The system is organized into eight specific steps, described as follows (using Joe as an example):

Step 1—Joe (married with three kids, two in his business) sent me, as I requested, an information package consisting of: a) two financial statements—personal and the last year-end for his business; b) a family tree (name and birthday for all of his potential heirs) and c) a list of the documents comprising his current estate plan (will get the actual documents later).

Step 2—After a thorough review of the package, Joe and I had a short phone conversation to answer my questions and make sure I understood Joe’s goals —short- and long-term—for him, his family and his business.

Step 3—I prepared a “discussion agenda” in outline form that detailed every strategy that might apply to Joe’s situation for the two plans to be created: 1) an estate plan and 2) a lifetime plan (from today until Joe dies). The two plans dovetail.

Step 4—We (Joe and I) spent almost 90 mins. discussing the items on the agenda and agreed on the plans (death and lifetime) that now needed to be turned into documents. It should be noted that Joe decided not to have his wife Mary on the agenda call (about half of my clients have their spouse on the call). At my request, he agreed to get Mary’s consent that the plans were okay with her. Joe honored my request and Mary actually called me twice with some good questions.

Step 5—Time for my “network” to go to work. The network is my admission that none of us know it all, certainly not me. So, after the agenda call, I wrote a detailed report for the network lawyer, so he could draft the necessary documents to implement the plans. Joe sent his current-estate plan documents to the lawyer. We kept the documents that were compatible with the new plans and amended or rewrote the rest.

My network insurance consultant reviewed Joe’s life-insurance policies. In the end, my insurance consultant was able to increase Joe’s death benefits from $2 million to $3.45 million without any increase in annual premiums.

The lawyer and insurance consultant called Joe to get acquainted, ask questions, answer Joe’s questions and get some additional information so they could do their professional work.

Step 6—The lawyer wrote a concept letter that explained every strategy to be used in the new plans. I reviewed the letter, made a few suggestions and the lawyer e-mailed the letter to Joe. It is important to note that the letter had nothing new in it for Joe. The purpose of the letter was to put in one place all the details of the plans that Joe, the lawyer and I had agreed to in one place in easy to understand language. Separate calls from me and the lawyer made sure that Joe and his wife were comfortable with the plans. When Joe said, “Yes,” the lawyer proceeded to the next step.

Step 7—The lawyer drafted the necessary documents that together made up the two plans: lifetime and estate. After he approved the documents, Joe had his local lawyer review the documents, and Joe signed them. Of course, the local lawyer asked some questions before the signing, and he thanked us for completing a task he did not have the expertise to do.

Step 8—The insurance strategies Joe ultimately used were determined by the network lawyer and myself. The network insurance consultant prepared all of the proposals (from six different insurance companies) and explained them to Joe. The amount of insurance ($3.45 million) was determined by Joe and I. My arrangement with the network insurance consultant is clear: He cannot sell any insurance or suggest an amount. His function is to supply the best possible information, so the client makes the decisions of how much insurance is needed and ultimately bought.

The result: Joe and his family will save about $3.7 million in estate taxes, and his family will get an extra $1.45 million in tax-free life insurance.

In just 5 months, we progressed from my first contact with Joe to having a complete plan. How much time did Joe actually spend? When I asked him he didn’t know exactly, but his best guess was a total of 3 to 4 hr.Even Joe, a rather conservative and very busy guy, said, “The best investment of my time I ever made.”Whether your estate plan is done or about to be done, check with your advisor to make sure your plan will deliver all your wealth to your family and that your lifetime plan works with your estate plan. Any questions, call Irv at 847/674-5295. MF